11 U.S.C. § 362 is the technical name of the section of the bankruptcy law that protects all filers from creditor actions while their case is pending. You may have heard of this referred to as the automatic stay. Let’s take a deep dive into how 11 U.S.C. § 362 protects bankruptcy filers, what you can do if a creditor violates the automatic stay and what exceptions to the automatic stay protections you should be aware of before filing your bankruptcy case.
Basics of the Automatic Stay
The automatic stay is one of the most fundamental debtor protections and immediately goes into effect with the filing of a bankruptcy petition. In fact, this is one of the primary reasons people file bankruptcy. During the stay, all secured and unsecured creditors are prohibited from any collection efforts on pre-petition debts, which are debts you incurred before bankruptcy. The automatic stay typically protects against all of the following:
Home foreclosure actions
Disconnection of utilities for pre-petition late payments
Collection of overpayment on benefits, including welfare payments
Creditors taking possession of property of the estate
An automatic stay may also put a temporary stop to litigation proceedings that began pre-petition, including the stay of an act to create or enforce certain liens.
What are the exceptions to the automatic stay under 11 U.S.C § 362?
The purpose of the automatic stay is to give the filer a breathing spell while the case is pending. However, not all collection actions are created equal, and the court system has to balance the interests of all parties. That’s why certain creditor actions are allowed even while the automatic stay is in effect.
Family Court Matters
If any of the following family court matters are scheduled to start or continue, the automatic stay will not apply:
Establishing or modifying domestic support obligations, including child support and alimony;
Child custody or visitation matters;
Domestic violence matters.
A governmental unit is permitted to hold a debtor’s income tax refund to offset a tax liability for a period that ended before the date of the order for bankruptcy relief, generally referred to as the petition date. This refund may be held as a tax setoff, pending the bankruptcy discharge. Tax audits, issuance of tax deficiency notices, assessment of taxes owed, and demands for a tax return may all continue, irrespective of the automatic stay.
In addition to the family law and tax matters above, the following legal and financial matters may not be protected.
The commencement of the case or continuation of any criminal action or proceeding will not be affected by the automatic stay. The stay does not apply to any criminal matters or efforts to collect criminal debts and punitive damages, including fines, restitutions, attorneys’ fees, and court charges and fees.
If the debtor agreed to have loan repayments deducted from wages for a pension, stock bonus, profit-sharing, or other IRS retirement plan, these deductions will continue despite the automatic stay.
If the debtor’s driver’s, professional, occupational, or recreational license is, or was scheduled to be, suspended, revoked, or restricted under court order, this action will not be impacted by the automatic stay.
This list is by no means exhaustive, but the matters above are the ones that come up most frequently in bankruptcy cases. Additionally, the automatic stay does not protect the filer from collection actions for post-petition debts.
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When does the automatic stay under 11 U.S.C § 362 end?
The length of the automatic stay is dependent on whether it applies to actions against the debtor or their real property. But generally speaking, the automatic stay ends, when the bankruptcy is discharged.
When a debtor receives a discharge in Chapter 7 or Chapter 13 bankruptcy, the automatic stay protecting the debtor ends and collection activity can resume on any debts that were not discharged. However, the discharge, which is a permanent injunction, protects the debtor against collection activity on discharged debts, even if they were not fully paid off. If any of your debts were not discharged in bankruptcy, creditors may resume collection activities following discharge.
Attempts to collect on collateral that is property of the estate are treated differently, however. When you file for bankruptcy, you must either return collateral property to the lender, or pay the lender for at least the fair market value of the property.
Keep in mind also that creditors may file a motion requesting relief from the automatic stay. This is common when secured creditors want to continue foreclosure or repossession proceedings.
The automatic stay and secured debts
The bankruptcy treatment of secured debts, including loans for real estate and vehicles, is largely dependent on how you wish to handle them, post-bankruptcy. Do you want the lender to repossess your car so that you can walk away from the hefty loan and buy a more affordable vehicle? Do you want to pay off any arrearages on the loan and keep the vehicle? What are your intentions?
When you file Chapter 7, you will complete a document called a Statement of Intention. In this document, you will explain your intention for any collateral that is property of the estate. You can surrender the property and walk away, redeem the property by paying the lender for its fair market value, or reaffirm the property by continuing to make payments as if the bankruptcy had never occurred.
If, however, you indicate that you’d like to redeem or reaffirm collateral property but fail to follow through within 30 days of the creditors meeting, the stay will be lifted (removed) 45 days after the creditors meeting. If you are behind on payments and indicate that you want to surrender the collateral, creditors may file a motion seeking relief from the stay. Depending on the projected time until discharge, they may also just wait for the stay to terminate on its own. If, however, there is a filing of a petition to repossess your vehicle or foreclose on your home before the stay has been lifted, you can object, at which point a final hearing will be scheduled to determine whether or not the creditor’s request will be granted.
Chapter 13 is a bit different, however. In Chapter 13 bankruptcy, your debts are reorganized into a three-to-five year repayment plan, after which any remaining debt is discharged. The automatic stay will protect you until the plan is confirmed, at which point creditors are bound by the plan and can’t try to collect from the filer directly. Collateral property and any arrearages can be included in the Chapter 13 repayment plan, allowing you to resolve past due payments and protect your home and vehicles.
Situations where the protections of 11 U.S.C. 362 are limited
Under certain circumstances, the protections offered by 11 U.S.C. 362 are limited, and can even be denied. Congress enacted many of these provisions to stop “serial filers,” a blanket term for debtors who take advantage of the automatic stay provision to hold onto personal property while paying little to nothing to their creditors. As part of the Bankruptcy Abuse and Creditor Protection Act of 2005 (BAPCPA), if you file Chapter 7, 11, or 13 and then file bankruptcy again within one year of your first case’s dismissal, there is a presumption that the second case was filed in bad faith.
If the debtor had a pending bankruptcy case within a year of the current case, the automatic stay will be limited to 30 days. However, if the prior case was dismissed more than a year before the current bankruptcy proceeding began, the 30-day restriction will not apply, even if the case was still open within a year of the most recent filing. If the debtor had two cases pending within the year before the current case was filed, no automatic stay will be applied at all.
In the event of a 30-day restriction, the debtor can file a motion, petitioning the court to extend the stay. But you will have to provide convincing evidence that your most recent bankruptcy filing was in good faith and not just to buy a few extra weeks. If you find yourself in such a situation, you must satisfy four requirements for your extension request to be approved. You are required to:
File a motion with the bankruptcy court to extend the automatic stay;
Notify all creditors that you are seeking an extension;
Complete the extension hearing before your 30-day restriction window has closed;
Prove that you filed the new case in good faith.
The fourth requirement is necessary to prove to the court that you are not taking advantage of the system by engaging in the practice of serial filing. If you are considering filing bankruptcy for a second or third time, it is in your best interest to first consult with an experienced bankruptcy lawyer to ensure that your automatic stay protections are maximized.
Your Rights if the Automatic Stay is Violated
One of the main benefits of the automatic stay is that it immediately stops harassing calls and collection actions of creditors. The moment your bankruptcy case is filed, creditors are notified of this protection and are prohibited from taking any further steps to collect from you. Once the creditor has notice of the case, the burden is on them to comply with the automatic stay. This means they can no longer call you, and any ongoing wage garnishments must stop.
But creditors don’t always follow the rules. If a creditor continues to contact you after the automatic stay has gone into effect, you can alert the court to the violation. Violators will be brought to court to face the consequences of their actions.
So what constitutes an automatic stay violation? In addition to phone calls and wage garnishments, creditors must stop sending letters or any other type of communication, and creditor lawsuits for nonpayment of debt must also come to a halt. Keep in mind, however, that creditors will rarely commit a willful violation of a stay; if you receive a single phone call after the stay has gone into effect, it is likely an accident. If the calls continue, you should immediately report the violation. An experienced bankruptcy lawyer can help you determine how to proceed if a creditor is in violation of the automatic stay.
As mentioned earlier, the automatic stay protects debtors from most collection activity and many legal proceedings, but there are exceptions. These include certain matters of family law, criminal actions, some tax measures, collection for debts incurred after filing bankruptcy, and some eviction actions, depending on the state you live in.
In some cases, a creditor may appear to be in violation of the automatic stay, even though it is operating within its legal limits. For example, a creditor may have requested that the automatic stay be lifted. If you have fallen behind on your mortgage and there isn’t sufficient equity to cover the outstanding balance, for instance, your mortgage lender may request to proceed with foreclosure, despite the automatic stay. Depending on the particulars of your case, the bankruptcy judge may or may not grant their request.
If you are considering bankruptcy as a path to debt relief and have questions about how the automatic stay will protect you, Upsolve offers an extensive library of free educational resources online to familiarize debtors with bankruptcy and the many alternatives available. If you’re eligible, you may even be able to use Upsolve’s free web app to prepare for your Chapter 7 filing.